Almost everyone knows Alan Greenspan as the long-serving chairman of the Federal Reserve System. What far fewer know is that in his younger days, Greenspan was a devotee of Ayn Rand and her anti-collectivist philosophy. The Alan Greenspan of the 1960s was a thorough-going advocate of pure capitalism, undiluted by government interference. All these years later, is he still?

I was eager to read his new book Capitalism in America to find out. All in all, the book, which is co-authored by Adrian Wooldridge, the political editor of The Economist, gives an accurate historical account of the roots of capitalism in America, its success in enabling people to raise their standards of living, and the reasons it has been so vilified by statists. In baseball terms, I would call the book a triple, but not a home run. I don’t regard it as a homer because of a number of mistaken bows to leftist notions about the benefits of big government. Capitalism in America is an excellent survey of our economic history marred by occasional lapses.

What Greenspan and Wooldridge get absolutely right is the fact that the original American system — secure property rights, the rule of law (particularly the sanctity of contract), and the freedom of individuals to try or fail at anything without government interference — made it possible for virtually everyone to succeed. Unlike most of Europe, where traditional privileges restricted prosperity to a few, in America, they write, “it was possible for people born in obscurity to rise to the top of society and for ordinary people to enjoy goods and services that were once confined to the elites.” Fortunately, the Founders understood that the people would thrive if the government refrained from undermining their natural urge to produce and invent. They knew it was crucial that people not be deprived of the fruits of their labor; not until 1914 did that change with the imposition of the income tax.

Under capitalism, Americans produced goods and services at a pace unknown in history. America’s economic expansion in the late 18th and 19th centuries was stupendous. Within a century of the founding of the United States, its people enjoyed a higher income than did people in the wealthier countries of Europe: Britain, Germany, France, and Italy. Alexis de Tocqueville saw why prosperity was rising in America. The authors quote him as writing, “the entire society is a factory.” He and many others noticed how extraordinarily busy Americans were — the energy that they put into their farms and trades. Under capitalism, free Americans used their brains and brawn much more effectively than did the taxed and regulated peasants of the Old World.

But in what I think is the book’s first error, Greenspan and Wooldridge attribute some of America’s success to the nation’s lack of “resource constraints.” That makes it sound as though prosperity depends on a nation’s natural-resource endowments. But nations do not own resources — people do, and nearly everyone has to trade with others (inside the country or outside of it) for the resources he needs. It isn’t “national resources” that matter, but the freedom to trade for resources, wherever they may be. Capitalism gave Americans that freedom. This is a minor quibble, though. The authors are free-trade advocates and later excoriate the businessmen and politicians who clamor for tariffs and trade restrictions.

Creative destruction

One of the key concepts of capitalism is what the Austrian economist Joseph Schumpeter called “creative destruction” — i.e., the inevitability that free people will come up with new methods and products that displace older, inferior ones. Progress necessarily wipes out some investments and jobs. The crucial thing about American capitalism was that (at least until fairly recently), we let creative destruction run its course. The authors write, “America has been much better than almost every other country at resisting the temptation to interfere with the logic of creative destruction. In most of the world, politicians have made a successful business out of promising the benefits of creative destruction without the costs.”

To say, however, that the United States experienced rapid economic growth due to capitalism in its early years is to overlook the vast difference between the North, with its free market for labor, and the South, where much of the labor force consisted of slaves. Greenspan and Wooldridge devote a chapter to the gap between the two regions. Slavery acted as a drag on innovation and the development of industry. One telling point the authors mention is the fact that 93 percent of all patents issued up until 1860 went to inventors in the North. The economic gap between the regions kept widening as, they write, “the North invested in more machinery and the South invested in more slaves.” Millions of industrious immigrants went to the free northern states, but relatively few to the hidebound South. Given the huge disparity in resources, the outcome of the Civil War was almost inevitable.

I only wish that Greenspan and Wooldridge had clearly stated that the slave system was simply incompatible with capitalism, which calls for mutual consent on all contracts. Stealing your workers is just as uncapitalistic as stealing your raw materials or threatening customers to compel them to buy. The South was economically backward because it relied so heavily on a coercive, pre-capitalist mode of production.

After the prodigious human and material costs of the Civil War, America began to grow and build again. The postwar decades were marked by decades of strong economic development. Business leaders kept finding ways to produce more with less. Bessemer steel plants, for example, could turn out more steel of better quality with substantially less use of coke than older hearths could. As a result, the authors write, “Steel put cheap tools in everybody’s hands and cheap utensils on everybody’s tables.” The price of kerosene fell sharply over many years, as oil refiners such as John D. Rockefeller improved their efficiency. (Cheap, universally avail-able kerosene for lighting, by the way, destroyed the whaling industry — that’s another point I wish Greenspan and Wooldridge had made.) Capitalism’s creative destruction was working wonders.

Standards of living for ordinary people increased steadily. Owing to improvements in farming, food processing, and transportation, Americans could enjoy far better, varied diets than ever before. New kinds of merchandizing, such as the Sears mail-order catalogue, made it possible for people to obtain goods they could have barely imagined in the past. Massive waves of immigrants poured into a country where they had boundless opportunity to succeed, unlike the case in their homelands.

During this period, the economy also benefited from an “invention” in the legal sphere, namely the limited-liability corporation. Most states adopted laws making it quite easy to form business corporations that could raise capital from dispersed investors. Enterprise was no longer restricted by the inconveniences of partnership or state charters. Laissez-faire had come to a form of business without which our economic expansion would have been much slower.

Dark clouds

However, some dark clouds were forming. One of them was the way a few capitalists — railroad magnates initially — began turning to the government to enhance and protect their profits. Thus did “state capitalism” gain a foothold. This has become, as the authors recognize, a grave and debilitating problem today, with business success depending more and more on good lobbying than on good products.

The other dark cloud was the movement called “Progressivism.” Progressives — a nice-sounding but misleading name they chose for themselves — were mostly university-educated intellectuals who were certain that society could be greatly improved by abandoning “chaotic” capitalism in favor of a scientifically managed economy. In their vision, enlightened government officials would set “fair” wages and prices, break up businesses that got “too big,” and have government provide for the needy. A leading Progressive economics professor, Richard Ely, declared in 1885 that laissez-faire was “unsafe in politics and unsound in morals.”

Progressive tracts and speeches had a big impact. Greenspan and Wooldridge put it this way: “The Progressives’ greatest achievement was to encourage a change in the American attitude to government. Before they got to work, Americans were optimistic about business and cynical about government. A couple of decades later, Progressives had persuaded a significant number of people that the opposite was the case.” And with that change in attitude came a clamor for all sorts of government controls: minimum-wage laws, maximum-hour laws, price controls for businesses “affected with a public interest,” antitrust laws, and more. Progressivism ushered in the pernicious notion that the people secure prosperity and safety through government power rather than through freedom under the rule of law.

At first, Progressivism did little damage. Most Progressive legislation was defeated and that which passed was frequently declared unconstitutional in the courts. Nevertheless, the seeds of a toxic plant that would eventually do great damage to capitalism were starting to sprout.

One of Greenspan’s favorite topics in his Rand days was gold and he still gives a strong defense for the gold standard as the foundation for capitalism. He and Wooldridge write, “The fact that the supply of gold was limited meant that gold was one of the most solid defenses of liberal society against the temptation to debauch the currency, the monetary equivalent of property rights. The universal acceptance of gold as a means of exchange made it easier to trade goods across borders.”

Unfortunately, governments could not resist the urge to meddle with the gold standard when it suited their supposed needs. In 1890, for instance, the government enacted the Sherman Silver Purchase Act, a blatant piece of special-interest legislation. Owing to a huge silver find in Nevada, the price of silver had fallen dramatically. Politicians who wanted to raise the price of silver and spark inflation that would benefit debtors passed a bill requiring the federal government to purchase nearly all the silver the mines were producing and turn it into coins.

This law undermined confidence that the U.S. would continue to adhere to the gold standard, eventually provoking the severe economic contraction known as the Panic of 1893. (For an excellent summation, I recommend this essay on the Mises website: wiki
.mises.org/wiki/Panic_of_1893) The Silver Purchase Act was later repealed and the nation returned unequivocally to gold after the election of 1896, when the anti-gold Democratic candidate William Jennings Bryan delivered his famous “Cross of Gold” speech. The book’s point is clear: capitalism works best when government protects sound money, something it has not done for more than a century.

Progressivism and war

Progressive efforts at undermining capitalism were given a tremendous boost by World War I. Woodrow Wilson, an outspoken opponent of laissez faire and limited government, dragged the nation into the war in Europe on a pretext, even though he had campaigned for reelection on a peace platform. War gave the government the excuse to vastly increase its powers over the economy and even to trample upon the First Amendment. Greenspan and Wooldridge sum up the unhappy situation thus: “The America of 1918 was a very different country from the America of the late nineteenth century. It had most of the accoutrements of a modern state-dominated society: an income tax, a central bank, and a swelling bureaucracy. And it had a significant group of people who thought that the major problem was that this hadn’t gone far enough.”

The 1920 election brought to Washington a traditional pro-business administration in Republicans Warren Harding and Calvin Coolidge, who would assume the presidency upon Harding’s death in 1923. They cut taxes, did away with much of Wilson’s bureaucracy, and made the right move of doing nothing when the economy went into a sharp recession in 1921. (The economy recovered and resumed growth in 1922.) But, the authors note, not all was well, as the Republicans returned to their traditional stance of high tariffs and instituted a national law to restrict immigration. Even its putative defenders couldn’t resist throwing sand into the gears of capitalism.

When the stock market crashed in late 1929, the White House was occupied by Herbert Hoover, a Republican with strong interventionist instincts. Instead of allowing the economy to cure itself through price reductions and the liquidation of unsound investments, Hoover wanted the federal government to play an active role in restoring prosperity. Over the objections of most leading economists, he signed the infamous Smoot-Hawley Tariff of 1930. He thought that keeping out imports would raise domestic prices and revive the economy. Instead, the result was an international trade war that saw American trade fall by two-thirds from 1929 to 1933. Hoover also pushed for a huge tax increase to cover the rising cost of federal programs. That increase was like the old medical practice of bleeding a sick patient — it further weakened a floundering economy.

Hoover was crushed in the 1932 election by Franklin D. Roosevelt. With unemployment at unprecedented levels, most of the people were willing to hand power over to a jaunty, upbeat politician who promised to revive the economy. But Roosevelt was far more of an interventionist than Hoover and surrounded himself with a “Brain Trust” consisting of intellectuals who admired the fascistic and communist regimes in Europe. Congress rubber-stamped his hastily drafted New Deal legislation, which was geared to solve the Depression through federal edicts and plans. Greenspan and Wooldridge point to many of those, and perhaps the most idiotic was the plan to raise the price of pork by ordering the slaughter of millions of baby pigs at a time when many people were going hungry. Again and again, Roosevelt’s manic interventionism made things worse.

Although the Depression dragged on and on, including the “Recession within a Depression” of 1937-38, Progressives were delighted that Roosevelt’s New Deal had, the authors write, “put the federal government at the heart of American society.” Capitalism was not gone, but the economic liberty it needs had been permanently reduced.

The New Deal failed, but the authors write, World War II “finally pulled the United States out of the slough of despond.” That’s another of the book’s errors. It’s a matter of conventional wisdom that war “stimulates” a nation’s economy, but that’s not the case and it is disappointing to hear Greenspan and Wooldridge say it. Of course, unemployment disappeared as millions of men were drafted and huge factories opened to produce guns, tanks, warships and so on, but prosperity was not restored. Yes, by 1944 the nation’s GDP was twice what it had been in 1939, but it consisted mostly of military hardware, not consumable goods and services. War merely hid people’s deprivation.

Furthermore, the authors declare that the war “forced companies to devise new techniques to boost output.” But under capitalism, as they’d shown throughout the book, people are constantly trying their best to improve efficiency. War provides no added stimulus.

Let me add one more complaint to the book’s treatment of the war and its aftermath. The Servicemen’s Readjustment Act of 1944 (known as the G.I. Bill) included a provision that guaranteed returning soldiers money for college. Again, the conventional wisdom is that this was a fabulous move by, the authors write, “turning America into the world leader in the proportion of young people who went to college.” They point to the large numbers of new engineers, teachers, accountants, and so on who entered the labor force after using their G.I. Bill college benefits.

The trouble with that reasoning is that America had never faced a shortage in any labor category prior to this federal intervention. All that had changed is that such professionals, who had usually in the past learned how to do jobs without college degrees, now spent four years learning many other things before entering the labor force and beginning to master their lines of work. The G.I. Bill, far from being a beneficial change, began the enormous folly of federal subsidies for higher education. Those subsidies have not made Americans any better educated but instead have merely wasted resources on needless credentials.

The last chapters of the book cover the economic slowdown over the last several decades — historically sluggish growth and falling numbers of new business startups. Has capitalism run out of steam, as some commentators (who favor still more government control and redistribution) maintain?

Greenspan and Wooldridge don’t think so. Capitalism, they argue, remains the optimal economic system. Unfortunately, we have terribly hampered it with bad government policies. As the authors say, America “is trapped in an iron cage of its own making: out of control entitlements and ill-considered regulations are forcing it to perform well below its potential….” I would add to that the vast number of subsidies government dishes out, gigantic federal borrowing that crowds out private investment, and the smog of crony capitalism that chokes Washington and our state capitals more every year. Government is the problem.

What’s the solution? The authors want to open the cage so that capitalism can again work. They’re right. Our future will be much brighter if we can return to the days when people were free and Washington, D.C., was not the nation’s heart.

George C. Leef is the research director of the Martin Center for Academic Renewal in Raleigh, North Carolina. He was previously the president of Patrick Henry Associates, East Lansing, Michigan, an adjunct professor of law and economics, Northwood University, and a scholar with the Mackinac Center for Public Policy.